EXHIBIT 99.1
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
NETSCHOOLS CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NETSCHOOLS CORPORATION
TABLE OF CONTENTS
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PAGE(S)
Report of Independent Accountants 1
Financial Statements
Balance Sheets
As of December 31, 2001 and 2000 2
Statements of Operations
For the years ended December 31, 2001 and 2000 3
Statements of Changes in Shareholders' Deficit
For the years ended December 31, 2001 and 2000 4
Statements of Cash Flows
For the years ended December 31, 2001 and 2000 5
Notes to Financial Statements 6 - 16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NetSchools Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' deficit and cash flows present fairly, in all material
respects, the financial position of NetSchools, Inc. at December 31, 2001 and
2000, and the results of its operations and its cash flows for the two years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, all of the outstanding stock
of the Company was purchased by PLATO Learning, Inc. effective May 9, 2002.
Atlanta, Georgia
July 11, 2002
NETSCHOOLS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
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DECEMBER 31,
2001 2000
ASSETS
Current assets
Cash and cash equivalents $ 249,000 $ 9,696,000
Restricted cash 125,000 152,000
Accounts receivable, less allowance for doubtful
accounts of approximately $229,000 and $104,000
at December 31, 2001 and 2000, respectively 908,000 3,541,000
Unbilled accounts receivable -- 574,000
Inventory, net 543,000 1,177,000
Deferred charges 3,657,000 --
Other current assets 187,000 352,000
------------ ------------
Total current assets 5,669,000 15,492,000
Property and equipment, net 1,131,000 964,000
Other non current assets 200,000 335,000
------------ ------------
Total assets $ 7,000,000 $ 16,791,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 2,304,000 $ 1,615,000
Accrued liabilities 1,500,000 1,872,000
Deferred revenues, current 6,355,000 1,586,000
Current maturities of long-term debt 6,438,000 5,035,000
Current maturities of capital lease obligation 71,000 11,000
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Total current liabilities 16,668,000 10,119,000
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Deferred revenues, net of current portion 280,000 526,000
Long-term debt 516,000 --
Capital lease obligations 71,000 26,000
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Total liabilities 17,535,000 10,671,000
Commitments and contingencies
Convertible preferred stock, Series A 5,944,000 5,944,000
Convertible preferred stock, Series B 7,982,000 7,982,000
Redeemable convertible preferred stock, Series C 15,909,000 15,909,000
Redeemable convertible preferred stock, Series D 23,800,000 23,800,000
Mandatorily redeemable convertible preferred stock, Series E 29,084,000 27,891,000
Mandatorily redeemable convertible preferred stock, Series 1 1,000 --
------------ ------------
82,720,000 81,526,000
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Shareholders' deficit:
Common Stock, no par value; 30,000,000 shares authorized;
2,992,806 and 2,791,546 shares issued and outstanding
as of December 31, 2001 and 2000, respectively 3,201,000 1,886,000
Accumulated deficit (96,456,000) (77,292,000)
------------ ------------
Total shareholders' deficit (93,255,000) (75,406,000)
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Total liabilities and shareholders deficit $ 7,000,000 $ 16,791,000
============ ============
The accompanying notes are an integral part of these financial statements.
2
NETSCHOOLS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
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2001 2000
Revenues $ 11,920,000 $ 10,114,000
Cost of revenues 12,282,000 14,377,000
Selling, general and administrative 12,647,000 12,393,000
Research and development 4,436,000 7,491,000
Depreciation and amortization 567,000 600,000
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Total operating expenses 29,932,000 34,861,000
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Loss from operations (18,012,000) (24,747,000)
Other income:
Interest expense, net 1,152,000 1,973,000
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Net loss $(19,164,000) $(26,720,000)
============ ============
The accompanying notes are an integral part of these financial statements.
3
NETSCHOOLS CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
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TOTAL
COMMON STOCK ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
Balance as of December 31, 1999 2,753,948 $ 774,000 $(54,006,000) $(53,232,000)
Exercise of stock options 37,598 37,000 -- 37,000
Accretion to redemption value of
Series C and D mandatorily redeemable
convertible preferred stock -- -- 3,434,000 3,434,000
Warrants attached to note payable 1,075,000 1,075,000
Net loss (26,720,000) (26,720,000)
----------- ------------ ------------ ------------
Balance as of December 31, 2000 2,791,546 1,886,000 (77,292,000) (75,406,000)
Exercise of stock options 201,260 101,000 -- 101,000
Warrants attached to long-term debt -- 1,214,000 -- 1,214,000
Net loss -- -- (19,164,000) (19,164,000)
----------- ------------ ------------ ------------
Balance as of December 31, 2001 2,992,806 $ 3,201,000 $(96,456,000) $(93,255,000)
=========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
NETSCHOOLS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
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2001 2000
Cash flows from operating activities:
Net loss $(19,164,000) $(26,720,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 567,000 600,000
Loss on disposal of fixed assets 11,000 --
Warrants attached to note payable -- 1,075,000
Amortization of discount on long-term debt 612,000 --
Changes in assets and liabilities:
Restricted cash 27,000 51,000
Accounts receivable 2,633,000 1,718,000
Unbilled accounts receivable 574,000 196,000
Inventory 1,634,000 (931,000)
Deferred charges (3,657,000) --
Other current assets 165,000 (101,000)
Other noncurrent assets 135,000 345,000
Accounts payable 689,000 (440,000)
Accrued liabilities (372,000) (1,237,000)
Deferred revenues 4,523,000 1,524,000
------------ ------------
Net cash used in operating activities (11,623,000) (23,920,000)
------------ ------------
Cash flows from investing activities:
Redemption (purchase) of short term investment -- 1,467,000
Purchases of property and equipment (586,000) (865,000)
------------ ------------
Net cash provided by (used in) investing activities (586,000) 602,000
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 4,805,000 9,120,000
Payments on notes payable (2,284,000) (3,870,000)
Proceeds from line of credit, net of payments -- 4,910,000
Payments on capital leases (54,000) (6,000)
Proceeds from issuance of common stock 101,000 37,000
Proceeds from issuance of preferred stock, net of
issuance costs 194,000 22,641,000
------------ ------------
Net cash provided by financing activities 2,762,000 32,832,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (9,447,000) 9,514,000
Cash and cash equivalents at beginning of period 9,696,000 182,000
------------ ------------
Cash and cash equivalents at end of period $ 249,000 $ 9,696,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 379,460 $ 376,725
Acquisition of property and equipment under capital leases $ 159,000 $ 43,000
Supplemental disclosure of non cash investing and financing activities:
In 2000, the Company converted $5,250,000 in notes payable into
2,234,031 shares of Series E-2 Preferred Stock
In 2001, the Company issued Series E - 2 Preferred Stock for inventory
valued at $1,000,000
The accompanying notes are an integral part of these financial statements.
5
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS
NetSchools Corporation, (the "Company") was incorporated in the State of
California in April 1996 to engage in the design, development, and
marketing of computer software and hardware products for use in
educational applications.
All of the outstanding stock of the Company was purchased by PLATO
Learning, Inc. effective May 9, 2002.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported and disclosures made in the
financial statements and accompanying notes. Actual results may differ
from those estimates. Such estimates include the useful lives and net
realizable value of property and equipment and the valuation of accounts
receivable, inventory and deferred income taxes.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
using the first-in first-out method.
PROPERTY AND EQUIPMENT
Property and equipment, including certain equipment acquired under
capital leases, are stated at cost. Property and equipment are
depreciated using the straight-line method over the assets' expected
useful lives which range from one to five years. Assets acquired under
capital leases are amortized over the term of the underlying lease.
Amortization of leasehold improvements is recorded on a straight-line
basis over the shorter of the useful life of the improvement or the term
of the lease. Such amounts are included in depreciation and amortization
expense. Maintenance and repairs are charged to expense as incurred.
SOFTWARE DEVELOPMENT COSTS
Research and development costs, which consist partially of software
development costs, are expensed as incurred. Statement of Financial
Accounting Standards No. 86 ("FAS 86") requires the capitalization of
certain software development costs after technological feasibility of
software is established. The time between the establishment of
technological feasibility and the general release of the Company's
products is limited. Accordingly, all such costs are included in research
and development.
6
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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INCOME TAXES
The Company accounts for income taxes using the asset and liability
method as prescribed by Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("SFAS 109").
Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The Company provides a valuation allowance for deferred tax assets when
it is more likely than not that all or a portion of the assets will not
be realized.
REVENUE RECOGNITION
2001
The Company uses AICPA Statement of Position No. 97-2, Software Revenue
Recognition and related interpretations to account for its revenue
transactions. During 2001, the Company changed the nature of its business
from that of primarily delivering its software products and related
services over local area networks (LANs) via hardware components that
were of a proprietary design, to a delivery platform based on an
application service provider (ASP) model. As such, the Company no longer
required that its customers purchase all hardware components from the
Company, and transitioned its software product to operate within an open
technology architecture. During 2001, the Company sold hardware, software
subscriptions, and professional services to its customers. When the
Company has a signed agreement, delivery has occurred, and
vendor-specific objective evidence ("VSOE") of the undelivered elements
exists, the Company recognizes revenue when the hardware is shipped. If
the delivered hardware is essential to the functionality of the
undelivered elements, it is recognized ratably over the minimum period
the customer is contractually obligated to subscribe to the software.
When hardware revenues are deferred over the life of the arrangement, the
costs of the hardware are deferred and recognized over the life of the
arrangement as well. Those costs are included in deferred charges on the
balance sheet. Software subscription fees are recognized ratably over the
subscription period. Professional services fees not considered essential
to the functionality of the solution ordered by the client are recognized
when the services are complete otherwise they are recognized ratably over
the software subscription period.
2000
Professional services revenue is recognized from fixed price contracts as
services are provided for or by using the percentage-of-completion method
of accounting, based on the ratio of costs incurred to the total
estimated project cost, for individual fixed-price contracts. Provisions
for any estimated losses on uncompleted contracts are made in the period
in which such losses become evident.
7
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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The Company's subscription revenue from web-based services include site
fees, hosting, royalties, and content sales. The revenues are determined
by individual contracts, one to three years in length, which specify
functionality of the site and the commerce conducted on the site. The
subscription fees are recognized ratably over the life of the contract.
Royalty revenue was recognized as earned. Content revenue is either
recognized ratably over the life of the contract for course usage on
bundled curriculum courses or recognized at the time of the purchase of
individual courses. Revenues from tangible goods, including books,
videotapes and CD-roms, are recognized at the time of shipment.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents. The Company places its cash primarily in checking and money
market accounts with high credit quality financial institutions.
In addition to cash and cash equivalents, trade accounts receivable is
the only financial instrument, which potentially exposes the Company to
concentrations of credit risk. As of December 31, 2001, 2 customers
comprised 46% of the Company's accounts receivable balance. Additionally,
for the year ended December 31, 2001, 58% of the Company's revenues were
generated by 2 customers.
The Company provides credit in the normal course of business to various
types and sizes of educational institutes located throughout the country.
As a result, the Company believes that concentration of credit risk with
respect to trade accounts receivable is not significant.
As of December 31, 2000, seven customers comprised 73% of the Company's
accounts receivable balance. For the year ended December 31, 2000, 53% of
the Company's revenues were generated by 3 customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for the Company's
financial instruments approximate fair values.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, requires the Company to present comprehensive
income, which is net income plus all other changes in net assets from
non-owner sources and its components in the financial statements. For the
years ended December 31, 2001 and 2000, the only component of
comprehensive income was net loss.
ADVERTISING
Advertising costs are expensed as incurred and are included in sales and
marketing expenses. Advertising expense was $406,000 and $131,000,
respectively during the years ended December 31, 2001 and 2000.
8
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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RECLASSIFICATIONS
Certain amounts in the financial statements have been reclassified to
conform with the current years presentation.
3. PROPERTY AND EQUIPMENT
At December 31, 2001 and 2000, property and equipment consisted of the
following:
DECEMBER 31,
2001 2000
Computer equipment $ 1,695,000 $ 2,413,000
Office equipment and furniture 280,000 433,000
Leasehold improvements 16,000 32,000
Capital leases 158,000 43,000
----------- -----------
2,149,000 2,921,000
Less: Accumulated depreciation (1,018,000) (1,957,000)
----------- -----------
$ 1,131,000 $ 964,000
=========== ===========
Depreciation and amortization expense was $567,000 and $600,000 for the
years ended December 31, 2001 and 2000, respectively.
4. ACCRUED LIABILITIES
At December 31, 2001 and 2000, accrued liabilities consisted of the
following:
DECEMBER 31,
2001 2000
Compensation and related benefits $1,108,000 $ 951,000
Accrued warranty -- 448,000
Other 392,000 473,000
---------- ----------
$1,500,000 $1,872,000
========== ==========
5. LONG-TERM DEBT
Convertible notes $ 4,805,000
Bank note payable 2,752,000
Less: Current maturities (6,438,000)
Discount on debt (603,000)
-----------
$ 516,000
===========
9
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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During 2001, the Company issued $4,805,000 convertible notes to holders
of the Company's preferred stock. The notes are due March 1, 2002 and may
convert to equity securities at 70% of the price of equity securities
issued by the Company in a subsequent round of financing defined by the
convertible note agreements. These notes were settled with consideration
from the purchaser of the Company, which was effective May 9, 2002. In
conjunction with the issuance of the convertible notes, the Company
issued 2,187,371 warrants to purchase Series E-2 Preferred Stock to the
note holders. Accordingly, the Company allocated the proceeds of the
notes among the warrants and notes according to their relative fair
values resulting in a discount on the notes of $975,000 to be amortized
over the term of the notes.
We amended in 2001 a financing agreement (the "Agreement") with a bank
whereby the bank provides financing up to a maximum of $6 million or the
lesser of (1) 85% of our eligible receivables and (2) the total unpaid
loan principal balance of $2.5 million. The balance of the bank note
payable was fixed at $3,266,000 at the date the agreement was amended.
According to the terms of the amendment, the principal of the debt is to
be repaid in monthly installments of $136,100 commencing on September 30,
2001. Borrowings under this agreement are collateralized by substantially
all of the tangible and intangible assets of the Company. The unpaid
balance of the debt accrues interest at the prime rate plus 3.5%. As of
December 31, 2001, the total balance under this agreement was $2,752,000.
In conjunction with the amendment of the agreement, the Company issued
275,010 warrants to purchase Series E-2 preferred stock to the lender.
According, the Company allocated the balance of the debt among the
warrants and debt according to their relative fair values resulting in a
discount on the debt of $239,000 to be amortized over the remaining 36
month term of the debt.
In conjunction with the Agreement, we issued 85,106 warrants during 2000
to acquire shares of our Series E-1 Preferred Stock at an exercise price
of $2.35 per share. Interest expense recorded to reflect the value of
such warrants was $126,000 as determined using the Black-Scholes model.
In 2000, we issued notes payable of $9,000,000 in conjunction with our
Series E financing. In conjunction with such borrowings, we paid a
commitment fee of $120,000 and issued 588,750 warrants to acquire shares
of our Series E-1 Preferred Stock at an exercise price of $1.76 per
share. Interest expense recorded to reflect the value of such warrants
was $949,000 as determined using the Black-Scholes model. The holders of
these notes converted $5,250,000 in debt into 2,234,031 shares of our
Series E-2 Preferred Stock.
In addition, we have a restricted cash deposit used as collateral for our
letter of credit with an independent third party.
10
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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Principal payments on debt over the next two years are due as follows:
2002 $ 6,438,000
2003 1,118,000
-------------
$ 7,556,000
=============
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancelable
operating and capital leases expiring in various years through 2005.
Future minimum payments under the noncancellable operating and capital
leases with initial terms of one year or more consist of the following at
December 31, 2001:
CAPITAL OPERATING
LEASE LEASE
2002 80,000 $1,297,000
2003 59,000 1,133,000
2004 31,000 95,000
2005 and thereafter 2,000 --
---------- ----------
Total minimum obligations $ 172,000 $2,525,000
==========
Less interest on capital leases 30,000
----------
Present value of net minimum obligation 142,000
Less: Current portions 71,000
----------
Long-term obligations at December 31, 2000 $ 71,000
==========
Rental expense under operating leases was approximately $443,000 and
$799,000 for the years ended December 31, 2001 and 2000, respectively.
From time to time, the Company is made party to routine litigation
incidental to the business. As of December 31, 2001, the Company was not
engaged in any legal proceedings that are expected, individually or in
the aggregate, to have a material adverse effect on the Company.
7. PREFERRED STOCK
During 2001, the Company issued 425,149 shares of E-1 mandatorily
redeemable preferred stock in exchange for inventory from a vendor with a
fair value of $1,000,000. In addition, the Company issued 106,383 shares
of E-2 mandatorily redeemable preferred stock from the vendor for
proceeds, net of issuance costs, of $192,000.
11
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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The Convertible Preferred Stock comprise the series designated as
follows:
NUMBER OF
NUMBER OF SHARES
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING VALUE
---------- ----------- -----------
Series A Convertible Preferred Stock ("Series A") 2,135,212 2,135,212 $ 6,000,000
Series B Convertible Preferred Stock ("Series B") 1,880,630 1,801,801 8,000,000
Series C Redeemable Convertible Preferred
Stock ("Series C") 3,121,069 2,412,605 16,888,000
Series D Redeemable Convertible Preferred
Stock ("Series D") 5,132,654 3,858,356 24,500,000
Series E-1 Mandatorily Redeemable
Convertible Preferred Stock 2,600,000 425,149 1,000,000
Series E-2 Mandatorily Redeemable
Convertible Preferred Stock ("collectively with
Series E-1 Preferred Stock referred to
as Series E") 25,000,000 12,783,575 30,041,000
Series 1 Mandatorily Redeemable Preferred
Stock ("Series 1") 5,500,000 4,805,314 1,000
---------- ---------- -----------
45,369,565 28,222,012 $86,430,000
========== ========== ===========
The Series A, B, C, D and E preferred stock are collectively referred to
as the "Senior Preferred Stock."
CONVERSION
Each share of Series A, Series B, Series C, Series D and Series E
Preferred Stock is convertible at the option of the holder into one share
of Common Stock based on a conversion price of $2.58, $3.41, $4.40, $4.40
and $2.35, respectively. These conversion prices are subject to
adjustment in certain circumstances including certain issuances of Common
Stock at below the conversion prices. The issuance of the Series E-2
Preferred Stock resulted in an adjustment to the conversion ratio for the
Series A, Series B, Series C and Series D shareholders. Each share of
Preferred Stock will automatically convert into Common Stock in the event
of an underwritten public offering of our Common Stock with proceeds of
at least $30,000,000.
In addition, upon a qualified Initial Public Offering or organic change
(as defined in the Agreement), the conversion price of Series E-2 shares
of preferred stock shall be reduced (but not increased) to provide the
holders an internal compounded rate of return of 15%.
VOTING
Senior Preferred Stock has voting rights, on an as-if converted basis,
identical to Common Stock.
DIVIDENDS
In conjunction with the issuance of the Series E-2 Preferred Stock during
2000, the Company amended its Articles of Incorporation to remove all
dividend rights relative to the Series A, B, C and D Preferred
Shareholders. Also, the holders of the Series C and D
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NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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Preferred Stock waived all rights to dividends which had previously
accrued on their respective instruments. Accordingly, the Company has
reversed the amount previously recorded for "Accretion to Redemption
Value" in the Statements of Changes in Shareholder' Deficit during 2000.
LIQUIDATION
In the event of liquidation, Series A, Series B, Series C, Series D,
Series E and Series 1 Preferred Stockholders are entitled to receive
$2.81, $4.44, $7.00, $6.35, $2.35 and $.0001818 per share, respectively.
If assets and funds are insufficient to be distributed among all the
holders of preferred stock, such assets and funds will first be
distributed ratably among the holders of the Series E Preferred Stock
until they have received their total relative aggregate Preferred Stock
Liquidation Preference Amount, then ratably among the holders of the
Series C and D Preferred Stock in proportion to their relative aggregate
Preferred Stock Liquidation Amounts, then ratably among the holders of
the Series A and B Preferred Stock in proportion to their relative
aggregate Preferred Stock Liquidation Amount and then among the holders
of Series 1 Preferred Stock.
REDEMPTION
Beginning June 30, 2005 and May 7, 2006, all outstanding shares of the
Series C and Series D Preferred Stock, respectively, are eligible to be
redeemed in full by the Company. In the event of redemption, each holder
of the Series C and Series D Preferred Stock would be entitled to receive
$7.00 and $6.35 per share, respectively.
On or after June 1, 2005, the Company shall redeem the issued and
outstanding shares of Series E Preferred Stock which the holders of the
Series E Preferred Stock have elected to redeem. The redemption amount
will be at a cash price equal to the fair market value, as determined by
a disinterested nationally or regionally recognized investment banking
firm. At the completion of an organic change, as defined, the holders of
Series 1 Preferred Stock may redeem their shares for the amount of their
original investment.
WARRANTS
In connection with the financing agreement (Note 5), we issued warrants
to purchase 78,829 shares of Series B Preferred Stock at $4.44 per share
and 60,000 shares of Series D Preferred Stock at $6.35 per share. The
Series B and D warrants are exercisable at any time prior to their
expiration in 2002 and 2003, respectively. The fair value of the warrants
have not been material to the financial statements. No warrants had been
exercised as of December 31, 2001.
In connection with the issuance of Series C and Series D Preferred Stock
we issued warrants to purchase 708,464 and 1,214,298 shares of Series C
and Series D Preferred Stock at $7.00 and $6.35 per share, respectively,
which are exercisable at any time prior to their expiration in 2005 and
2006, respectively. We determined the value of warrants to be $2,900,000
by using the Black-Scholes model. No warrants had been exercised as of
December 31, 2001.
In connection with the issuance of the Series E-2 Preferred Stock, we
issued warrants to purchase 1,335,106 shares of Series E-2 Preferred
Stock at an exercise price equal to
13
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$2.35. We determined the value of the warrants to be $1,974,000 using the
Black-Scholes model. No warrants had been exercised as of December 31,
2001.
14
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. COMMON STOCK
The Company is authorized to issue 275,000,000 shares of Common Stock.
Certain Common Stock was issued to the founders of the Company pursuant
to Stock Repurchase Agreements that provide that, in the event that
either founder ceases to be an employee or consultant to the Company, the
Company has the right to repurchase all or any portion of the shares held
by the founder, subject to a two-year vesting period, at the original
purchase price of $0.01 per share. Also in connection with issuance of
the founders' shares, the founders contributed technical know-how which
did not result in accounting recognition in the accompanying financial
statements. At December 31, 2001, all such shares were fully vested.
9. 1996 STOCK OPTION PLAN
In October 1996, the Board of Directors adopted the 1996 Stock Option
Plan (the "Plan") providing for the issuance of incentive or nonstatutory
Common Stock options to employees and consultants of the Company. At
December 31, 2001, a total of 5,000,000 shares of Common Stock were
reserved for issuance pursuant to the Plan.
Options under the Plan may be granted for periods of up to ten years at
prices at the date of grant of no less than the fair market value per
share for incentive stock options and not less than 85% of the fair
market value per share for nonstatutory stock options, except for options
granted to a person owning greater than 10% of the total combined voting
power of all classes of stock of the Company, for which the price of the
option must be no less than 110% of the fair market value. The fair
market value of our Common Stock is determined by the Board of Directors
or a committee thereof. Options are exercisable at the date of grant and
generally vest 25% at the end of the first year and at a rate of 1/48 per
month thereafter. Shares issued as a result of unvested option exercises
are subject to repurchase by the Company. As of December 31, 2001, no
shares issued related to option exercises were subject to repurchase.
The following table summarizes option activity under the Plan during 2000
and 2001:
SHARES
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
--------- --------- -------------
Balance at December 31, 1999 2,359,940 2,486,115 $1.00 - $1.25
Granted (1,343,500) 1,343,500 $0.50 - $1.25
Exercised -- (32,648) $1.00 - $1.10
Forfeited 660,017 (660,017) $1.00 - $1.25
--------- --------- -------------
Balance at December 31, 2000 1,676,457 3,136,950 $0.50 - $1.25
Granted (1,210,755) 1,210,755 $0.50
Exercised -- (201,260) $0.50 - $1.25
Forfeited 864,512 (864,512) $0.50 - $1.25
--------- --------- -------------
Balance at December 31, 2001 1,330,214 3,281,933 $0.50 - $1.25
========= ========= =============
15
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The options outstanding and currently exercisable by exercise price at
December 31, 2001 are as follows:
OPTIONS OUTSTANDING AND EXERCISABLE
---------------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED
CONTRACTUAL AVERAGE
EXERCISE NUMBER LIFE EXERCISE
PRICE OUTSTANDING (IN YEARS) PRICE
-------------- ----------- ---------- -----------
$ 0.50 1,396,280 9.05 $ .50
$ 1.00 249,416 5.45 $ 1.00
$ 1.10 1,011,531 7.58 $ 1.10
$ 1.25 624,706 8.32 $ 1.25
------------- --------- --------- ---------
$0.50 - $1.25 3,281,933 8.18 $ .87
------------- --------- --------- ---------
The Company accounts for employee stock options in accordance with
Accounting Principles Board Option 25, Accounting For Stock Issued to
Employees and related interpretations. The estimated fair market value of
an option is determined by the compensation committee and approved by the
Board of Directors. The Company recognized no compensation expense
relative to options granted in 2001 and 2000, respectively.
The Company has adopted the disclosure-only provision of Financial
Accounting Standards Board Statement 123 ("FAS 123"), Accounting for
Stock-Based Compensation, which defines a fair value based method whereby
compensation expense is measured at the grant date based on the fair
value of the award. Had compensation cost for the Company's stock-based
compensation plan been determined on a fair value basis in accordance
with the provisions of this statement, the Company's net loss for the
years ended December 31, 2001, would have been as follows:
2001 2000
------------ ------------
As reported $(19,164,000) $(26,720,000)
Pro forma (19,273,000) (27,079,000)
The amount of the pro forma charge has been determined using the minimum
value method as permitted for private companies by FAS 123. For purposes
of the calculation, management used the following assumptions:
2001 2000
------- --------
Risk free interest rate 5.10% 5.10%
Expected term 6 years 6 years
Expected volatility 80.00% 80.00%
Expected dividend yield 0.00% 0.00%
16
NETSCHOOLS CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
Significant components of our deferred tax liabilities and assets as of
December 31, 2001 and 2000, are as follows:
2001 2000
------------ ------------
Deferred tax assets
Net operating loss carryforwards $ 27,202,000 $ 21,410,000
Capitalized research and development 4,387,000 5,690,000
Accrued liabilities and reserves 3,200,000 724,000
Research and development credits 601,000 601,000
Other 773,000 799,000
------------ ------------
Total deferred tax assets 36,163,000 29,224,000
------------ ------------
Less: Valuation allowance (36,163,000) (29,224,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The Company has provided a valuation allowance for the full amount of our
net deferred tax assets since management believes that realization of any
future benefit from deductible temporary differences, net operating loss
and tax credit carryforwards cannot be sufficiently assured at December
31, 2001.
At December 31, 2001, the Company had federal net operating loss
carryforwards and tax credit carryforwards of approximately $76 million
and $416,000, respectively, available to reduce future taxable income,
which expire beginning in 2016. The Company's ability to utilize net
operating loss carryforwards and tax credits is subject to limitations as
set forth in applicable federal and state tax laws. As specified in the
Internal Revenue Code, an ownership change of more than 50% by a
combination of the Company's significant stockholders during any
three-year period would result in certain limitations on the Company's
ability to utilize its net operating loss and credit carryforwards. It is
likely that such a change in ownership occurred in 1997 and 2000.
17
NETSCHOOLS CORPORATION
UNAUDITED INTERIM FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2002
NETSCHOOLS CORPORATION
UNAUDITED CONDENSED BALANCE SHEET
AS OF APRIL 30, 2002
ASSETS
Current assets
Cash and cash equivalents $ 164,000
Accounts receivable, net 700,000
Inventory, net 500,000
Deferred charges 1,640,000
Other current assets 149,000
-------------
Total current assets 3,153,000
Property and equipment, net 935,000
Other non current assets 136,000
-------------
Total assets $ 4,224,000
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 2,470,000
Accrued liabilities 1,647,000
Deferred revenues 3,864,000
Current maturities of long-term debt 10,783,000
Current maturities of capital lease obligation 71,000
-------------
Total current liabilities 18,835,000
Capital lease obligations 69,000
-------------
Total liabilities 18,904,000
-------------
Commitments and contingencies
Convertible preferred stock, Series A 5,944,000
Convertible preferred stock, Series B 7,982,000
Mandatorily redeemable convertible preferred stock, Series C 19,744,000
Mandatorily redeemable convertible preferred stock, Series D 27,088,000
Mandatorily redeemable convertible preferred stock, Series E 29,084,000
Mandatorily redeemable convertible preferred stock, Series 1 1,000
-------------
89,843,000
-------------
Shareholders' deficit:
Common Stock 2,128,000
Accumulated deficit (106,651,000)
-------------
Total shareholders' deficit (104,523,000)
-------------
Total liabilities and shareholders deficit $ 4,224,000
=============
The accompanying notes are an integral part of these financial statements.
NETSCHOOLS CORPORATION
UNAUDITED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2002
Revenues $ 5,236,000
Cost of revenues 5,692,000
Selling, general and administrative 3,917,000
Research and development 1,668,000
------------
Total operating expenses 11,277,000
------------
Loss from operations (6,041,000)
Interest expense, net 587,000
------------
Net loss $ (6,628,000)
============
The accompanying notes are an integral part of these financial statements.
NETSCHOOLS CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2002
Cash flows from operating activities:
Net loss $ (6,628,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 308,000
Changes in assets and liabilities:
Accounts receivable 1,703,000
Inventory (88,000)
Deferred charges 1,640,000
Other current assets 59,000
Other noncurrent assets 186,000
Accounts payable (235,000)
Accrued liabilities 385,000
Deferred revenues (3,622,000)
-----------
Net cash used in operating activities (6,292,000)
-----------
Cash flows from investing activities:
Purchases of property and equipment (7,000)
-----------
Net cash used in investing activities (7,000)
-----------
Cash flows from financing activities:
Proceeds from notes payable 4,604,000
Proceeds from line of credit, net of payments (681,000)
Payments on capital leases (6,000)
Proceeds from issuance of common stock 2,000
Proceeds from issuance of preferred stock, net of issuance costs 1,000
-----------
Net cash provided by financing activities 3,920,000
-----------
Net decrease in cash and cash equivalents (2,379,000)
Cash and cash equivalents at beginning of period 2,543,000
-----------
Cash and cash equivalents at end of period $ 164,000
===========
The accompanying notes are an integral part of these financial statements.
NETSCHOOLS CORPORATION
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Business
NetSchools Corporation was incorporated in the State of California in April 1996
to engage in the design, development, and marketing of computer software and
hardware products for use in educational applications.
All of the outstanding stock of NetSchools Corporation was purchased by PLATO
Learning, Inc. effective May 9, 2002.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. We have
included all normal recurring adjustments considered necessary to give a fair
presentation of our operating results for the interim periods shown. Operating
results for these interim periods are not necessarily indicative of the results
to be expected for the full fiscal year. For further information, refer to our
audited financial statements and accompanying notes for the years ended December
31, 2001 and 2000.